Another banking crisis will knock out the core

Europe’s banks are broken. We have always suspected that, but recent evidence suggests that nearly six years after the crisis first began to manifest itself seriously they are still grossly impaired.

Recall what it is that banks do — despite the mystique and the bluster, its actually pretty simple.

Some people have money and others need it. Banks act as a middleman to facilitate those that want it to get it from those that have it, in return for them taking a cut of the interest charged. Lending money out is risky. That is why banks charge an interest rate on loans that is greater than that which they pay on deposits — apart from needing to make a profit and cover costs, they need to put some money aside for the inevitable defaults and bad loans. These retained profits, plus some other ‘safe’ assets, are the banks reserves, or its capital